AAA-rated Russian equities star looks beyond the oil barrel

When you type ‘fund manager’ into a Google Images search, pictures of suited men glued to the screens in their offices appear. For Olga Karakozova, though, a computer is not enough when it comes to analysing the companies she is interested in. She is willing to go in-depth, even if it means heading 1,000 metres below the ground.

No conditions are too extreme for the Muscovite equity manager, not even when visiting Norilsk, Russia – the world’s northernmost city, located within the Arctic Circle – where Karakozova visited a nickel mine.

Wearing a yellow helmet and a green jumpsuit, she explored the mine, which provides metal to a mining company which is among the top 10 holdings in her Danske Invest Russia A fund. While there, she met the workers and assessed their working conditions, all as part of her research process.

The episode certainly reflects Karakozova’s investment style, which has earned her an AAA rating from Citywire.

‘For me, it is important to understand the company and its underlying drivers very well,’ she explains. ‘It is not just important to meetmanagement. You also have to speak with the people to understand how motivated they are and to get a taste of the atmosphere within the company.’

When selecting companies, the equity manager looks for three criteria: delta; changes – either internal, such as a managerial shift, or external, such as market consolidation; and quality, proven by a healthy balance sheet and an attractive valuation.

Karakozova believes that companies need to look attractive not only when compared with their domestic peers but also when compared with other international companies.

‘When you find a company that combines these three factors, it’s done,’ she says.

Not just an oil tale

Despite being based in Helsinki, Karakozova is determined to play an active role in the growth story of her home country.

The manager has been Citywire rated since June 2013 and gained an AAA rating in November 2017. Sitting in third place in the Russia equity sector over the three years to the end of June 2018 – with returns of 67.3% versus the average manager’s 58.8% – she is not afraid of following her own path, leaving the index behind.

'Around 70% of the index is commodities such as oil, gas and metals, but Russia’s GDP is more diversified than that,’ she says.

'There are certain sectors which are growing much faster than the GDP and which are exposed to domestic consumption, such as real estate, private healthcare and IT. They are not in the index, but I know they are valuable and I want to invest in them,’ Karakozova says.

One example is a real estate company that she had been monitoring since its IPO in 2011. Despite liking the firm’s management, Karakozova did not immediately invest in the company as the price was too high.

In 2016, after a five-year wait, she finally saw an opportunity and knew it was time to take action.

‘The company started looking very cheap, as Russia’s economy was weathering a storm,’ she says. ‘I noticed some pick-up in the demand, as the ruble depreciated and inflation started falling faster than expected. This allowed central banks to start decreasing interest rates.’

As a result, Russia’s emerging middle class has started looking for new, good quality apartments. ‘I took the opportunity, as the company combined the delta, quality and valuation criteria that I look for,’ she says.

Taming the unexpected

With 17 years of experience in the sector, Karakozova is used to dealing with the extreme conditions of the largest country in the world, whether that involves sudden management changes or macroeconomic shifts.

In February, the fund manager and her team were looking at one of Russia’s largest food retailers. Conditions seemed to be promising until the company’s chief executive and founder decided to step down and sold most of his stake to a state-owned bank. The company’s share price suddenly dropped.

However, despite Karakozova’s initial disappointment, a new CEO was then appointed, who had previously served as an executive at another major retailer. Karakozova regained trust in the company, which is now the 11th largest holding in her portfolio at 2.75%.

‘The Russian market overreacts to both positive and negative news,’ Karakozova explains. Volatility in the country can sometimes be as extreme as the weather conditions.

‘Experience and accurate analysis of single stocks and the macroeconomic conditions is what you need to overcome the challenge. If you are careful, you can find very good opportunities,’ she adds.

That was her experience with Sberbank, a state-owned bank which is now the second largest holding in the Danske Invest Russia A fund, at 5.39% of the portfolio .

The bank suffered from the US sanctions that were launched against Russian oligarchs and their companies in April, and the share price dropped from RUB 256 on 6 April to RUB 213 on 9 April.

‘All of a sudden, the company was very cheap and I decided to buy because I thought the sudden fall in price was due to sentiment rather than the fundamentals of the company,’ Karakozova explains

Fuelling returns

The oil industry is another example of Karakozova’s approach to navigating the extremely volatile Russian market.

The fall in the oil price in 2014, when it plummeted from $110 per barrel to just $30 at the start of 2016, had a significant impact on the country’s economy, as oil and gas account for more than 60% of Russia’s exports and around 40% of the country’s federal revenue.

This was not enough to discourage Karakozova, or to make her sceptical about commodities. The proof of her confidence is that Lukoil remains the largest holding in the portfolio at 9.3%.

‘You always have to look at the fundamentals of the company and analyse the big events that influence the economy. Back in 2014, the company suffered because the economy in general was not doing well,’ she says.

‘At the moment, Lukoil can generate enough cash to repay all the dividends in the event of a crisis, even though the price of the oil is lower than it was in 2014.’

It seems it is worth going in-depth then, even if it means wearing a bright yellow helmet and anoversized green jumpsuit.

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